A deal to create the world's biggest aerospace company, three months in the making, died in a three-minute phone call.

On Tuesday night, after days of intense negotiations among European government officials and executives over the proposed merger of Airbus parent European Aeronautic Defence & Space Co and British defence giant BAE Systems, German Chancellor Angela Merkel called French President François Hollande. Merkel told Hollande that Germany believed the deal's negatives outweighed its benefits for her country, and that she couldn't support it, according to several people familiar with the conversation.

On Wednesday, EADS and BAE said they were ending talks but defended the effort.

"We had an opportunity to test a very bold strategy," said BAE Chairman Dick Olver in an interview.

Now, the failure of merger talks raises uncertainty about the two companies' prospects and highlights European leaders' inability to put national interests aside to build continent-wide institutions.

Germany's reluctance, in particular, surprised many people involved because the companies believed they had a plan that would turn government-controlled EADS into a more conventional company. "I completely underestimated the German opposition," EADS strategy chief Marwan Lahoud said in an interview.

EADS is 15% owned by the French government and 5.5% owned by Spain. Germany holds no direct stake in EADS, but German car giant Daimler owns 15% and was already in the process of selling much of that stake to a state-controlled German bank. People familiar with the thinking in Berlin said government officials there doubted a key part of the companies' pitch to them—that the merger would boost EADS's defence sales in the huge US market.

Germany also feared being marginalised by France and Britain, which have bigger aerospace and defence industries. All three countries wanted to protect jobs and industrial sites. France wanted to keep its amount of shares, while Britain wanted to reduce political influence.

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The governments' inability to agree comes against the background of much bigger issues facing European leaders, such as saving the euro and fixing struggling banks across the 27-nation European Union. Efforts to resolve those issues have faced a similar conflict between politicians' statements of a desire to strengthen Europe and actions to pursue national interests.

Investors, meanwhile, had shown disapproval for the linkup by depressing both companies' share prices, and on Wednesday boosted EADS's stock price by more than 5% in Frankfurt. Shares in BAE, which is grappling with defence cuts in Britain and the US and had seen the deal as a way to diversify, closed off 1.4% in London.

EADS chief executive Tom Enders, who took over the position in June, may now face tighter constraints. Enders, a German, has soured his already-testy relations with the German government, people familiar with thinking in Berlin said.

Enders said after the deal was revealed September 12 that he hoped it would end government interference in EADS. Under the merger plan, governments would cut their stakes and have direct influence only over issues of national security. The companies had combined revenue of about $90bn last year and, when the deal was announced, a combined market value of $49bn.

Instead, observers noted, the failure of government talks on how much influence they should have over the combined entity only highlighted that EADS's future will be decided by politicians.

Amid intense negotiations over recent days, including frequent three-way video conferences last week, many political obstacles the deal faced were resolved, according to government officials and other people involved in the talks. Britain and France, for example, made progress toward an agreement on Britain's requirement that France limit its stake in the new company to 9%, according to these people.

But in recent days, German opposition to the deal grew clearer, people involved in the talks said. German officials have said that they weren't convinced that the deal would be good for the country or its industrial base.

"It's further evidence of this constant gap between politicians' claim to be driving policy in one direction, while their actions demonstrate that their priorities are in another," said Nick Witney, a senior fellow at the European Council on Foreign Relations, a think tank in London.

Witney, a former British official who was the first chief executive of the EU's military policy body, the European Defense Agency, said EADS and BAE's effort to integrate and strengthen Europe had "been sabotaged by government selfishness and shortsightedness."

Talks on the deal grew out of problems with the Eurofighter Typhoon fighter jet, an early effort to integrate European defence, which BAE and EADS build with Italy's Finmeccanica. Eurofighter had lost a big Indian order in January to a competing French plane, and Enders and BAE chief executive Ian King felt the project needed help, officials at both companies have said.

In May, the two men met to discuss the Eurofighter, but talk soon shifted to the possibility of an outright merger, people familiar with the discussions have said. It was a brash idea, but the men had reason to think they could win political support. European political leaders for many years have talked of the need to consolidate the continent's defence-and-aerospace industry to better compete with US behemoths such as Boeing and Lockheed Martin Corp and to handle declining military spending.

After Enders took over as EADS chief on June 1, analysis of the possible deal intensified, according to people close to the talks.

In mid-July, senior officials from the two companies met at a hotel near Munich to hash out merger terms, the people close to the talks said. They settled on a 60%-40% split, with EADS taking the larger stake, the people familiar said.

"It will be like a steeple chase," one banker involved in the talks predicted. "We can fall at each fence."

Later in July, EADS provided the German government with more details.

EADS officials outlined what they thought was a good deal for Berlin. Germany, which has no direct influence over EADS, would gain a special share to protect its strategic interests in the enlarged entity, people familiar with the presentation said.

German officials predicted the tie-up would falter because France would likely reject the idea of limiting its involvement, according to people familiar with the talks. The French government takes an active role in managing companies it considers strategic. Meanwhile, France spelled out conditions: Paris would keep an equivalent stake in the new company and wanted headquarters to remain in Toulouse.

As talks appeared to be making progress, Germany also outlined its conditions, saying it would want to own a stake similar to France's 9% interest in the new company, people familiar with the talks said.

Over recent weeks, Berlin introduced another request, these people said. In particular, German officials demanded a headquarters in their own country, they said.

While Britain and France narrowed the gap between their positions, Germany remained firm in its demands. On Tuesday night Merkel delivered her verdict to Hollande: Germany couldn't support the deal.

"We could not get agreement with the two European governments on our red lines," said BAE's King. "It is accurate to say that Germany was the main sticking point."

—Cassell Bryan-Low contributed to this article.

Write to Daniel Michaels at daniel.michaels@wsj.com, David Gauthier-Villars at David.Gauthier-Villars@wsj.com, Dana Cimilluca at dana.cimilluca@wsj.com and Marcus Walker at marcus.walker@wsj.com
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